FMN Struggles to Find Value as Rising Cost Squeeze Earnings

FMN Struggles to Find Value as Rising Costs Squeeze Earnings

Flour Mills of Nigeria (FMN) Plc, the largest food and agro-allied company listed on the Nigerian Stock Exchange could be bought for ₦80.162 billion.

The company’s which operates in consumers goods segment have it stock traded at ₦19.60 for 4,100,379,605 outstanding shares in the stock market.

In the third quarter of financial year 2020, FMN Plc cost to sales ratio settled at 89.49% from 88.75%.FMN Struggles to Find Value as Rising Costs Squeeze Earnings

That means that for every ₦100 sales, the company expended ₦89.49 as cost, thus thinned down margin.

In an estimates, equity research analysts at Meristem Securities Limited said outlook for 2020 revenue is quite positive.

Analysts maintained the position having recognised that FMN has consistently reported solid financial performance over the years.

In the last five years, the company had expanded at 15.81% on the average per annum.

Confirming its competitive standing as reflected in market share, the firm reported a 16.66% growth in top-line to ₦152.72 billion in third quarter of 2020.

The food business – which typically contributes 62% to overall revenue – particularly benefited from the closure of the land borders as patronage increased in the Pasta business segment, resulting in a 9% volume growth during the period.

Analysts said the firm also recorded impressive performances in the Sugar and Agro-allied divisions, both of which grew volumes by 9% and 6% respectively.

During the nine-month period, the agro allied division recorded the highest growth of 19.56% in revenue, closely followed by 13.42% in the sugar division and 2.95% in Food.

Meanwhile, revenue from the support service division plummeted significantly by 32.43% in the period. Management also alluded to the launch of additional products and improvement in Business to Customer transactions as revenue drivers during the period.

“We expect a surge in volumes driven by improved aggregate spending on basic food items across the country”, Meristem stated in a note.

Against this backdrop, analysts said they expect a growth of 21% in Q4:2020 revenue to ₦153.83 billion. This translates to an overall revenue growth of 9.38% or ₦576.86 billion for the 2020 financial year.

On Friday, investors in the local bourse valued the company at ₦81.187 billion on 4,100,379,605 outstanding shares at a unit price of ₦19.80.

“As the pioneer flour milling company in the country, FMN has a significant hold in the market”, Meristem Securities stated.

The company accounts for about 20% of the market share, its production capacity stands at about 8000Mtpd, making it the second largest after OLAM International Limited.

The firm boasts of a rich portfolio of products including; Noodles, Pasta, Semovita, Masavita, Refined sugar, Margarine, Vegetable oils, and a range of breakfast cereals. Its flagship foods brand, Golden Penny enjoys popularity and patronage in many Nigerian households.

Meristem Securities recalled that in 2019, the firm completed the restructuring of its Agro-allied division, making it a stand-alone subsidiary- Agro-Allied Holdco.

This was carried out to improve the efficiency of the division and to ensure focus on core competencies across the group.

In addition, the subsidiary is better positioned to access funds that are best suited for its business operations, especially the agricultural sector intervention funds provided by govt.

The firm also announced its 100% acquisition of Sunti Golden Sugar Estates Limited – 17,000 farm hectares and 4,500MT/d of sugar milling capacity. This is in alignment with the Government’s backward integration drive.

For FMN, cost remains the company’s bottleneck. Direct costs has been trending upwards, rising by 13.22% to ₦136.66 billion in Q3:2020.

Consequently, cost to sales inched higher slightly, pegging at 89.49%, from 88.75%.

Meristem said: “We expect pressures on direct costs in the near term on the back of increased logistics costs.

“The continued congestion at the seaport and bad road networks will not aid performance, with the consequent increase in logistics costs.

“However, the odds are stacked against costs”, equity analysts at Meristem Securities explained.

Analysts stated further that FMN is overly dependent on imports of its key raw materials – wheat, making its significantly exposed to the volatility in the foreign exchange.

“In the event that the Central Bank extends its foreign exchange restriction to wheat imports, FMN will be negatively impacted, resulting in a surge in its direct costs (north of 88%)”, Meristem stated.

The firm successfully raised ₦30 billion from its ₦70 billion Bond Programme in February 2020, the proceed of which were channeled into restructuring its interest-bearing liabilities.

Also, it improved its funding mix to a cheaper source of capital, paying down short-dated expensive capital to ₦62.57 billion, from ₦71.05 billion.

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Meanwhile, FMN expands long term obligations to ₦59.95 billion as against ₦46.23 billion in 9-month of 2020 financial year.

As a result, finance costs declined by 19.58% in Q3:2020 to ₦4.28 billion, from ₦5.32 billion in Q3:2019.

Debt to equity ratio also improved to 0.74x from 0.84% in the corresponding period.

Interest cover inched upwards slightly to 1.84x from 1.65x in 9-month of 2019.

Analysts said the moderation in finance costs boosted earnings, which rose by 3.59% to ₦8.160 billion compare to ₦7.88 billion in 9-month of 2019 result.

Return on Equity remained flattish at 5.37% compare to 5.22% in 9-month of financial year 2019.

Analysts explained that this was mainly due to lower asset use efficiency during the period.

That is in addition to decline in leverage with asset turnover and financial leverage at 0.96x and 2.63x, down from 1.04x and 2.73 respectively.

“Within the nine-month forecast period (April – December), we anticipate a moderation in earnings by 3.94% to ₦7.84 billion as against ₦8.16 billion in 9-month of 2020 prompted by the anticipated pressure on costs”, Meristem explained.

FMN Struggles to Find Value as Rising Costs Squeeze Earnings


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